China can endure much more pain

The American economy flourishes. President Donald Trump puts all US prosperity at risk in his fight against China.

The American economy flourishes. Every week a figure becomes available that president Donald Trump proudly shares with his electorate via Twitter: the lowest unemployment rate in fifty years, a record for the Russell 2000 – a stock index with smaller, nationally operating companies – or, as at the end of last week, there is unprecedented optimism in the economy.

US China flagsThe tax reduction agreed at the end of last year works wonders. Although ‘wonders’? Every well-functioning economy goes through the roof with a budget stimulus of 5% of gross domestic product. Anyway, the White House, which can look forward with great confidence to the November elections, will think: who can defy me?

It explains why Trump has declined the recent Chinese offer to buy $ 70 billion of additional US energy and agricultural products in exchange for not imposing his tariffs. He could have told his constituents that Beijing had given in to his pressure, but instead he doubled up his efforts. Already he has put forward $ 450 billion in tariffs. China responded by withdrawing its offer and announcing equally burdensome countermeasures.

Lack of free media

On 6 July the American taxes will take effect. If nothing happens until then, the trade war is a fact. And for that war, China is in my opinion way better positioned. To begin with, Beijing will react to American aggression and defend the Chinese honour. Even if there is some dissatisfaction, this will not be heard because of the lack of free media. Contrary, China knows exactly where the weak spots in the US are: ranchers and farmers who will lose a substantial part of their incomes without Chinese purchases, aircraft builders in Seattle (Boeing) and certainly also a lot of investors. And they will certainly make themselves heard.

China can only levy additional charges on US products at $ 130 billion on American products – it simply doesn’t import more stuff. But it can easily pay back with the same currency. Beijing will just use other weapons. Presumably, Beijing will first make the lives of the 10,000 American companies that are active in China more difficult.

Trump will shrug his shoulders about their well-being – they deemed it necessary to leave the US – but then he forgets how important they are for Wall Street. Asia accounts for 9% of the turnover of S&P500 companies, which is already quite considerable, but for tech giants such as Apple, Alphabet and Microsoft that percentage is a multiple higher.

Since these are valued at an average of 7.8 times the turnover – the rest of the market is at 1.5 – those funds will lose a lot if China decides to cut their activities for a while.
Beijing can of course also use other weapons, such as an intervention on the foreign exchange market. (A cheaper currency neutralises the effect of import duties.) But much more disruptive, it can also cause a nasty shock on the US bond market by suddenly selling a pile of foreign currency reserves.

If the trade war hurts American growth, Trump may backtrack, though I suspect that he will choose to raise the stakes and by doing so drag down the entire world economy.

  • This column was first published in Het Financieele Dagblad on Monday, June 25th (in Dutch)



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